Somdutta Singh, serial entrepreneur | Founder and CEO, Assiduus worldwide | Investor | Best Selling Author | Advisor – Government of India.
What is the purpose of a company? For some founders, it’s financial success; for others, stability; for still others, running a business offers a sense of freedom. Your priorities can and will evolve over time. For example, you may need a more accommodating schedule after your business reaches a certain level of cash flow. That’s why the most successful companies recognize that creating value for customers, teams and investors should be the primary goal of any business and that the interests of these groups are inexorably intertwined. This makes it impossible to create sustainable value for one group. Creating value for the customer should be the number one priority, but this cannot be done without selecting, developing and rewarding the right staff or providing consistently favorable returns to investors.
In short, success should not be measured by appreciation, but by value creation.
A company creates value when it can create sustainable revenues, guarantee stable cash flow, make a real impact and define an economically favorable framework that will last for generations.
I like how business leader and consultant Robin Sharma shares his thoughts on this topic. He is often quoted as saying, “Money is a function of value creation. The more value you create for other people, the higher the turnover of your organization.”
Value creation is comprehensive
Long-term value cannot be created by neglecting the needs of your customers, suppliers or team members.
Investing in long-term growth creates stronger economies, higher living standards and more opportunities for individuals. In other words, a focus on value creation drives progress on a large scale, whether it’s lifting millions out of poverty, increasing literacy rates, or facilitating innovations that improve quality of life and longevity.
As a preliminary step, I advise leaders to prioritize long-term value creation for its resource allocation and financial strength benefits. Part of this is taking into account the stakeholders of the employees. A company that tries to increase profits by providing a high-pressure work atmosphere, underpaying its staff or reducing benefits will find it difficult to attract and retain staff. Lower-quality employees can lead to lower-quality products, falling prices and reputational damage.
As an entrepreneur, appreciation for me is an output, not an input criterion.
Unicorns in India
Let’s take the example of startups in India, and specifically unicorns (private startups worth over $1 billion). According to the Indian Government’s 2021-2022 Economic Survey, India is now the third largest startup ecosystem in the world, with 14,000 recognized startups, up from just 733 in 2016-2017.
In addition to this massive growth in the startup sector in general, India also has a bloom of unicorns over the past four years. The emphasis on unicorns in recent economic stories about India’s startup environment has made me wonder why valuation has become the key criterion for success. Why is there the mindset among startup founders that if they don’t make a billion dollars in appreciation, their attempt is a failure?
Paradoxically, many of these seemingly successful companies have consistently lost money. To me, this is an example of the idea that while valuation is a useful tool, valuation alone should never be the determinant of a company.
Appreciation versus value creation
The problem is that appreciation is often confused with value creation. Market conditions have a major influence on and influence the valuation. Even mathematically, two different raters can assign different values to the same company. That company could also be valued much higher in a given market compared to what it would have had under other circumstances.
As a result, valuation is an unpredictable and grossly misleading measure.
When a company’s goal is simply to make a successful exit or to maintain its place in the market, it backfires in terms of value creation. The road from startup to mature company is difficult. Post-start-up companies often lose focus because they’re not really designed to move forward; their emphasis is only on endings.
Here are some ways to focus on value creation rather than appreciation, and as a result set yourself up for success long after the startup phase:
• Be an outsider and create something disruptive and distinctive with its own niche.
• Orientate critical decision-makers by designing financial and non-financial objectives that integrate short-term and long-term value creation.
• Create an interactive business model that generates value over multiple time horizons.
• Integrate KPI dashboards to monitor and encourage progress toward goals.
• Encourage team members to envision long-term growth for your organization.
Companies that achieve exponential growth and balance it with other priorities, such as cost management and employee benefits and retention, create the most value. Entrepreneurs who start and run these types of businesses know that long-term business success starts with a solid foundation built to last.
Business expansion and development is easy to evaluate. Sustainability is not. Giving in to appreciation mania is pointless. User acquisition, profitability, and forecasting are all essential metrics, but it’s not the right way to build a business that leaves a legacy.